Interest rates in the UK are projected to fall less than anticipated over the next two years, following the government’s spending and borrowing outlined in the Budget, according to the OECD, a prominent global economic organisation.
The OECD cautioned the Bank of England and other central banks against aggressive rate cuts, citing concerns over “persistent” inflation in service prices. In its latest global outlook, the Paris-based organisation highlighted the “remarkable resilience” of the world economy.
The OECD forecasted that, due to the UK’s growth and inflation outlook, the Bank of England would likely keep rates higher compared to other central banks. It projected UK interest rates to settle at 3.5% by 2026.
Andrew Bailey, Governor of the Bank of England, has forecast four interest rate cuts next year, contingent on the UK economy performing as expected. However, the economy faces "persistent price pressures" due to significant government expenditure and uncertainties surrounding labour market conditions, which could necessitate maintaining a tighter monetary policy for longer, the OECD warned.
The report predicts UK GDP growth will improve to 1.7% next year, driven by increased government spending outlined in the Budget. However, this boost is expected to fade, slowing growth to 1.3% the following year.
Globally, the OECD anticipates economic growth of 3.2% this year and next, emphasizing that while resilience persists, “risks and uncertainties remain high.”
In the UK, wage-driven inflation in services and government spending are expected to keep inflation above the Bank of England’s 2% target for the next two years. The OECD raised its inflation forecast for next year to 2.7%, up from 2.4%.
Government deficits are projected to remain substantial, reaching 4.5% of GDP in 2025 and 3.9% in 2026, keeping public debt above 100% of GDP and on an upward trajectory. The OECD stressed the importance of ensuring that new fiscal rules effectively preserve fiscal sustainability while supporting productivity-enhancing public investments.
The OECD reiterated the need for reforms in the UK labour market, emphasizing the importance of boosting female workforce participation through expanded childcare support. It also highlighted the need to overhaul the apprenticeship system to equip workers with the skills required for modern economies.
Chancellor of the Exchequer Rachel Reeves responded positively, stating:
“Growth is our number one priority, and the OECD upgrade means the UK is set to be the fastest-growing European economy in the G7 over the next three years. But growth only matters if it translates into more money in people’s pockets.
“That’s why we safeguarded take-home pay from higher taxes in the Budget and are committed to growth that improves living standards. This Government is driving growth through initiatives like the National Wealth Fund, reforms to regulatory frameworks and pension mega funds to attract investment, and planning law changes to rebuild Britain for the better.”
Globally, the OECD forecasted GDP growth of 3.3% in 2025 and 2026, with inflation expected to gradually align with central bank targets. However, it warned that global economic resilience "masks significant disparities across regions and countries and remains subject to substantial downside risks and uncertainties.
